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Charter takes a dip

Shares drop 20% after debt plan unveiled

NEW YORK — Shares in Charter Communications fell more than 20% Tuesday after the cabler said it would raise $750 million through a convertible-debt offering that is expected to appeal to hedge funds.

Shares in the nation’s No. 4 cable operator fell 55¢, closing at $2.16 on the Nasdaq.

The stock decline was a reaction to news that the company plans to issue up to 150 million shares to go along with the convertible debt sale.

Convertibles are securities that pay interest like bonds, but can convert into stock under certain circumstances.

Company has 305 million shares outstanding, meaning the extra 150 million shares would dilute present stockholders’ ownership by about one-third.

Hedging bet

Extra shares are to provide more liquidity for the stock in order to make the new debt more attractive to hedge funds. Hedge funds — lightly regulated pools of investment money, usually from wealthy individuals or institutions — often employ an investment technique called convertible arbitrage, which involves buying a convertible debt while simultaneously shorting the stock.

The troubled cabler, controlled by billionaire Paul Allen, launched the convertible-debt offering in order to avoid running out of cash when $588 million of convertible notes come due in October.

The current offering will be used to redeem those notes and to pay down $162 million in other debt.

The offering staves off a liquidity crisis for the company but does not significantly improve its balance sheet, and it increases the number of shares outstanding.

Space to operate

Deal gives Charter some breathing room in 2005, wrote Oppenheimer & Co. analyst Tom Eagan in a research note, as it pushes out the maturity date of the $588 million notes to 2009.

Increased financial flexibility will help the company restructure in 2005, but investors are still hoping Allen will step in with additional cash to rescue the ailing entity.

Charter is reported to be an interested bidder in certain Adelphia cable systems, which could help the cabler increase its cash flow.

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